Federal Housing Finance Agency director Mel Watt testified in front of the Senate Banking Committee last week and said his top priority regarding Federal National Mortgage Association FNMA and Federal Home Loan Mortgage Corp FMCC is to ensure that they're capitalized enough so they no longer have to draw on the U.S. Treasury’s line of credit.
However, Watt made clear that his efforts are intended solely to limit risk while Fannie Mae and Freddie Mac remain under conservatorship and have nothing to do with returning control back to shareholders.
“It would, therefore, be a serious misconception for members of this Committee, or for anyone else, to consider any actions the FHFA may take as conservator to avoid additional draws of taxpayer support either as interference with the prerogatives of Congress, as an effort to influence the outcome of housing finance reform, or as a step toward recap and release,” Watt said.
In order to achieve his goal, Watt will likely attempt to modify the Preferred Shares Puchase Agreements to devote some or all of Fannie and Freddie’s income to recapitalization. In addition, Watt said the FHFA has the legal authority to withhold Fannie and Freddie’s dividend payments if he is unable to reach an agreement with the Treasury.
Don't Get Too Optimistic
While recapitalization of Fannie and Freddie would be a step in the right direction for common shareholders, Height Securities' Edwin Groshans urges investors not to get too optimistic. Groshan’s points out that Treasury Secretary Steven Mnuchin clarified at his confirmation hearing that previous comments he made about a bipartisan solution for getting Fannie and Freddie out from under government control were “never that there should be a recap and release.”
“The extraordinarily long time it would take the GSEs to achieve a risk-based capital requirement would prohibit the entities from making any dividend payments to shareholders for a decade or longer,” Groshans explains. “This differs materially from taking a trading position to capitalize on a potential change to the dividend payment frequency or the less likely scenario of the GSEs retaining some capital.”
Groshans estimates Fannie Mae would need roughly $26.3 billion in core capital and Freddie Mac would need $16.2 billion in core capital under the now-suspended risk-based capital requirements for financial institutions.
After a big post-election surge on hopes that the Trump administration would return control of Fannie and Freddie back to shareholders, both stocks are down more than 28 percent in 2017.
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